| BUY-BACK OF SECURITIES | | | | days from the date of completion of buyback. |
| By:Suneera Nerissa Madhok | | | | • The company has to furnish to the ROC a |
| INTRODUCTION: | | | | certificate duly verified by two directors including the |
| The provisions concerning buy-back of securities by | | | | managing director and the whole time Company |
| an Indian company are provided in the Companies Act, | | | | Secretary regarding compliance with the |
| 1956 of India (“Act”) namely Section 77A and if | | | | abovementioned rule. |
| a company is listed in any registered stock exchange | | | | F. A return on buy-back of securities has |
| in the country then the SEBI (Buy Back of Securities) | | | | to be filed by the company with the ROC in a form |
| Regulations, 1998 are applicable. | | | | specified in Annex- A to the Rules within 30 days of |
| OBJECTIVE: | | | | completion. |
| This article endeavours to elucidate the procedure | | | | G. The company has to maintain a |
| applicable to company wishing to Buy-back its | | | | Register on shares bought back in a form supplied in |
| securities. | | | | Annex- B of the rules. |
| MAIN TEXT: | | | | PROVISIONS WITH REGARDS TO |
| The articles of association of the company intending to | | | | SHAREHOLDERS RESIDENT OUTSIDE INDIA |
| buy-back its securities must specifically empower the | | | | In case any shareholders are persons resident outside |
| company to do so. | | | | India, the price at which the buy-back can take place |
| A. Modes of Buy Back | | | | has to be in compliance with the pricing guidelines |
| Permitted modes of buy-back by private and unlisted | | | | stipulated by the Reserve Bank of India. The price at |
| public companies: | | | | which the shares can be bought back by an Indian |
| (a) from the existing shareholders on a | | | | company from its shareholders who are resident |
| proportionate basis through private offers; | | | | outside India must be at a price which is lower of two |
| (b) by purchasing the securities issued to | | | | independent valuations of the shares, one by statutory |
| employed of the company pursuant to a scheme of | | | | auditors of the company and the other by a chartered |
| stock option or sweat equity. | | | | accountant or by a merchant banker in Category 1 |
| In addition a Special Resolution by the shareholders in a | | | | registered with the Securities and Exchange Board of |
| general meeting authorizing the buyback is required. | | | | India. |
| [Provided if, the buyback is more than 10% of the total | | | | OTHER FEATURES |
| paid up capital or free reserves of the company then | | | | • Buy-back is permitted only for the equity |
| such buy-back has to be authorized by the board by | | | | shares and preference shares, employees’ stock |
| means of a resolution passed at its meeting.] | | | | options and sweat equity shares, of a company. |
| The notice sent to the shareholders convening the | | | | • A company can use only the following to |
| general meeting at which the special resolution is | | | | Buy-back its shares: |
| proposed to be passed has to be accompanied by an | | | | (a) its free reserves; |
| explanatory statement which must include the | | | | (b) any money lying in the securities premium |
| following: | | | | account |
| (i) a full and complete disclosure of all material | | | | (c) proceeds from the issue of any shares or |
| facts; | | | | other specified securities, except for proceeds from |
| (ii) reasons for the necessity for the buy-back; | | | | an earlier issue of shares or other specified securities |
| (iii) the class of security intended to be purchased | | | | of the same class that are being bought back. |
| under the buy-back; | | | | A company cannot utilise any money borrowed from |
| (iv) the amount to be invested under the buy-back; | | | | banks/ financial institutions for the purpose of buying |
| and | | | | back its shares. |
| (v) the time limit for completion of buy-back (not | | | | • Buy-back is permissible only for fully paid-up |
| exceeding 12 months from the date of passing of the | | | | shares / securities of a company. Partly paid-up |
| special resolution). | | | | securities cannot be bought back. |
| B. Letter of Offer | | | | • The ratio of the debt (i.e. secured and |
| • A draft letter of offer containing | | | | unsecured debts) owed by the company, after the |
| particulars specified in Schedule- II of the rules has to | | | | buy-back, should not be more than twice its paid-up |
| be filed with the Registrar of Companies (ROC). | | | | capital and free reserves. |
| • A declaration of solvency has to be filed | | | | • Quantum of buy-back |
| in form No. 4A has to be filed with the ROC alongwith | | | | (a) the over-all limit of buy-back of securities is |
| the letter of offer. | | | | restricted to 25% of the total paid-up capital (i.e. |
| • (the declaration of solvency verified by | | | | paid-up equity and preference share capital) and free |
| an affidavit by the board that it is capable of meeting | | | | reserves of the company. |
| its liabilities and will not be rendered insolvent within a | | | | (b) buy-back of equity shares by a company in |
| period of one year of the date of declaration and has | | | | any financial year cannot exceed 25% of its total |
| to be signed by at least two directors.) | | | | paid-up equity capital. |
| • A declaration of solvency has to be filed | | | | • Time Restrictions |
| in form No. 4A with the ROC along with the letter of | | | | (a) To be completed within 12 months of date |
| offer. | | | | shareholders meeting or meeting of the board of |
| C. Offer Procedure | | | | directors; |
| (i) Letter of offer to be dispatched within 21 | | | | (b) After a buy-back, an issue of similar kind of |
| days from the date of its filing with ROC. | | | | shares and/or securities, including by way of a |
| (ii) Offer to remain open from 15 to 30 days from | | | | preferential allotment, rights issue or public issue is |
| date of dispatch of letter of offer. | | | | prohibited for up to 6 months from the date of |
| (iii) Acceptance to be on a proportionate basis if | | | | completion of buy back. |
| shares offered by members are more than the total | | | | However, this does not preclude the company from |
| number of shares to be bought back | | | | issuing any bonus shares or issue of shares in |
| (iv) Offers lodged deemed to be accepted unless | | | | pursuance of subsisting obligations (such as conversion |
| rejection is communicated within 21 days of date of | | | | of warrants, debentures or preference shares). |
| closure. | | | | Conclusion: |
| D. Payment Procedure | | | | Buy back is a mechanism through which the company |
| Immediately after conclusion of the date of offer, the | | | | pays of its investors and buys off its own shares. |
| company has to open a special account and deposit | | | | Once the buyback is completed, the shares that have |
| the entire amount to be paid as consideration for the | | | | been bought back do not rest with the company but |
| buy-back. | | | | are extinguished. It is usually employed when the stock |
| E. Extinguishment of Share Certificate | | | | value of the company is highly diluted or if the |
| • The share certificates bought back have to | | | | company has high amounts of free reserves or if the |
| be physically destroyed in the presence of the | | | | promoters of the company want to acquire a greater |
| Company Secretary in whole time practice within 7 | | | | controlling percentage within the company. |